How to help your children buy a property without giving away cash
Posted on Thursday, March 3, 2022
Banks are increasingly aware not all parents can help children buy a property with cash.
Helping loved ones onto the housing ladder with a lump sum of money is a luxury, especially in the midst of the current cost of living crisis.
Soaring house prices mean the goalposts of homeownership have moved even further away for first-time buyers. While low-deposit mortgages returned last year, banks are still wary of lending to those seen as higher risk.
In its place, the Bank of Mum and Dad has stepped up. More than 80pc of parents have helped their children with a gift or a loan towards a deposit, according to Legal and General.
But for many, giving away a lump sum might not be possible or advisable, said Mark Harris, of mortgage broker SPF Private Clients. "Banks have recognised this, launching a number of specialist schemes to help parents who wish to assist their children."
How do they work?
They are variously called family mortgages, guarantor mortgages, joint mortgages and joint borrower sole proprietor mortgages, and all enlist the help of a family member to get a first-time buyer on the property ladder.
These deals allow parents to provide collateral on the loan, either in the form of putting money in a specific savings account or a legal charge over existing property. This effectively makes the first-time buyer into a less risky customer.
Mr Harris said: "Those such as the family springboard mortgage with Barclays use parents’ savings to offset the bank's risks. So for example, a 5pc deposit effectively becomes a 25pc deposit case as far as the lender is concerned.
"Parents effectively ‘loan’ their savings for a period of time, getting them back at a later date with interest. They are able to do their bit but are not left out of pocket."
In this instance, generous family members need to consider whether their savings would be better invested elsewhere, where they could earn a higher return.
It is also worth bearing in mind that a lot of lenders place a restriction on the maximum age of a guarantor, which in many cases sits at 75 years old and can affect affordability. Parents and grandparents should be also wary of any tax pitfalls.
This type of lending is typically more expensive than standard loans. But in some instances the security of a family guarantor is enough to reassure banks and building societies into lending first-time buyers 100pc of the property value.
'Our first home would have been years away without it'
When Emily Stilwell and her partner were on the hunt for a mortgage with a small deposit during the height of the pandemic, they found it an impossible task.“ Any time we found something within our affordability range and which accommodated our deposit size, the lender would pull the product before we could get it,” said Ms Stilwell, a 33-year-old administration officer.
Her father suggested they take out a family mortgage, with the loan for the new property secured by the value in Ms Stilwell's parents' home.
A family mortgage with the Family Building Society requires a 5pc deposit from the buyer, which can be gifted. If Ms Stilwell and her partner default on the mortgage in the first 10 years, or if the property loses value when it is sold in the same period, the bank can repossess her parents' house to make up the shortfall.
They were able to secure a 95pc mortgage for £217,000 with the Family Building Society; without this, Ms Stilwell said it would have taken years to save up enough for a sufficient deposit. They now own a terraced house in Southampton.
“We are a very close family and my parents trust us not to default on any payments, therefore protecting their security. For others who are this comfortable with their family, it is definitely a good option,” she added.
Beware of the stamp duty trap
Some loans, such as joint mortgages, allow parents and children to buy a property together, but also require the former to appear on the deeds of the property too.
This can have painful tax consequences and if the guarantor already owns their own home, which is likely, they will be subject to a stamp duty surcharge of three percentage points.
One way to avoid this tax trap is to opt instead for a joint borrower, sole proprietor mortgage. This type of loan names the guarantor on the mortgage, but keeps their name off the property deed and so avoids additional capital gains tax and stamp duty liabilities.
Mr Harris said: "Their names do go on the mortgage, however, so their income is taken into account when the lender decides how big a mortgage to give the borrower, which should mean their children can access a bigger mortgage."
Eleanor Williams, of Moneyfacts, added: "Anyone who wishes to consider one of these specialist products would be very wise to seek independent, qualified advice - the mortgage market is a very changeable landscape at the moment."